<p>If you were to take advantage of a mutual fund loss ($500) on a $20,000 sale, would this have a negative effect on state, federal, or college given aid? The FAFSA number goes down slightly because the ($500) reduces the AGI but the remain assets are approx $50,000. </p>
<p>If $12,000 of the sale was primarly used to switch assests into a roth IRA, would colleges see it as money that could have paid tuition rather than save for parents retirement? I ask this because now it is not counted as an asset, so the move is a smart one. It is their only retirement plan. Each year they sale assets to fund Roth IRA's when possible. </p>
<p>This sale also prevents them from filing an A or EZ form even though it would otherwise allow them to qualified for a zero. The parents are early 50's and live a fugal lifestyle.</p>
<p>For FAFSA if the parents are in their 50s (and there are 2 parents) then their asset protection will be more than $50,000 so the assets should have no affect.</p>
<p>A school can make a special circumstances adjustment to reflect a Roth conversion. It is at the discretion of the FA officer but it seems like most posters here have found that their schools do make an adjustment. Best to check with the school in question. There is a new tax rule for a couple of years where the tax on Roth conversions can be spread over a couple of tax years. I don’t know the exact details but the s/b available on IRS web site.</p>
<p>The impact of losing the automatic 0 EFC eligibility is the thing I would investigate most closely. If there are no large assets, no reportable untaxed income, and the students have no large income/ assets then the EFC would still be quite low if the income is low enough to be eligible for auto 0. If any of the above are present it may have a large impact. Student income/assets for instance can have a big impact on the EFC. They are ignored in the auto 0 but will be considered if auto 0 eligibility is lost.</p>
<p>It is all moot if this has already been done in 2009 though.</p>
<p>Thanks, Swimcat. One clarification, the parents are using regular savings to fund a Roth IRA not converting to a Roth. Would it make a big difference to FAFSA if they did a Roth IRA (not deductible) vs a traditional IRA (deductable)? It would reduce reportable assets if they are doing an IRA before they file.</p>
<p>A Roth contribution would likely make the EFC lower than a traditional IRA contribution. This is because the Roth contribution does not reduce taxes. taxes are an allowance against income in the EFC formula. </p>
<p>For instance say income was $50,000 and income taxes were $5000 (totally imaginary numbers). In the EFC formula the tax of $5000 would be deducted from the $50,000 giving $45,000 available income (before any other allowances). If the taxpayer contributes to a traditional IRA and this caused an $800 tax savings making the tax $4200 then the available income in the EFC formula would be $50,000 less $4200 = $45,800. The roth would not have that affect. Neither a traditional or a roth contribution is allowed to reduce income itself, but it would reduce reportable assets.</p>
<p>Now I understand the tax savings for IRA’s. It makes sense now. Thank you.</p>